Credit Score - Know Your Score and Understand It

Low credit scores and credit problems need your attention

Many consumers today don't understand the importance of personal credit scores and how it affects their everyday lives. Some are not aware that credit scores exist, or that credit scores are readily available and accessible online.

Your credit score can determine what you pay for auto financing and leasing, credit cards, mortgages, and insurance. It can even affect whether or not you get a job or rent an apartment.

Currently, the loan and mortgage market has tightened up significantly. Buyers with poor credit who could easily get a new car loan or new home mortgage a few months ago are now being turned away. Many car dealers are turning away customers with less than a 700 credit score. It has become more important than ever to have good credit.

Many poor credit scores result from errors or outdated information about you in your credit history reports. Negative information can remain in your report for seven years, bankruptcies for ten years. You should always work to improve your score and repair your report if you find errors.

What is a credit score?
A credit score, called FICO score, is a mathematical way of condensing all the information in your credit history down to a single number that represents your credit worthiness and loan risk. This way, lenders don't have to sort through your entire detailed credit history report. One number says it all. Credit scores range from 300-850.

This single number has an incredible influence on how you are viewed by companies with which you want to do business. They judge you by this number.

Be aware that lenders can also use other information, along with your credit score, to make decisions about your credit worthiness. For example, debt-to-income ratio and job stability are very important. Credit reports and scores do not account for this type of information.

“ What you pay for your car loan or lease directly depends on your FICO credit score ”

Who creates credit scores?
Credit reports and credit scores are produced by three different companies in the U.S. — Equifax , Experian, and TransUnion. Each company collects its data independently of the the other companies, which means data about a particular individual can differ among the three companies. Lenders often obtain consumer credit scores from each of the companies and average them to get a composite score.

Your credit score can vary by as much as 50 points or more between the three credit agencies. For someone with borderline good-bad credit scores, it can make a big difference, depending on which agency score the lender looks at. Lenders may look at only one score, or they might look at all three.

Consumer credit reporting has been around for many years. Credit scores, however, are relatively new, and only recently been made available to the public through the Fair Isaac Corporation's web site, MyFICO.com .

What's a good credit score?
It depends on the lender. Each lender uses its own judgment regarding scores. In general, an score above 680-700 is considered "prime." Prime scores get the best rates. Scores in the 620-680 range are "near-prime" and scores below 620 are usually considered "sub-prime." Sub prime scores can expect loan refusals or interest rates that are as much as 10%-12% higher than prime.

The average score for all U.S. consumers is well above 700, which means that most people who use credit have a well established credit history, relatively few open accounts, low account balances with high limits, no missed or late payments, and no bankruptcies in the last 10 years.

Free credit score?
Consumers have been able to get copies of their credit history reports for years, usually for a fee, but free in some states. That's changed now. However, what most consumers don't know is that credit scores cannot be obtained for free. Some credit information companies claim free credit scores but are actually just including your score in with another product. Not bad, just a little deceptive.

Beginning in late 2004, the Fair and Accurate Credit Transaction Act (FACTA) began phasing in provisions for free reports (but not free credit scores) for consumers across the country. A consumer can request a free report from each of the three major credit reporting agencies once every 12 months through AnnualCreditReport.com.

However, consumers have experienced many problems and delays getting their free reports, and many have chosen to go directly to the reporting agency web sites, such as Equifax , pay a small fee, and be able to see their reports instantly online, rather than wait for separate printed reports to be sent to them in the mail. Consolidated online reports from all three reporting agencies are available from various companies on the Internet.

It is absolutely essential that you review your credit reports (from all three agencies) regularly, since your credit score is created from this information. Your credit score can only be changed by changing your credit history information.

If your credit history contains errors, old information, or evidence of credit fraud or identity theft, your credit score will be affected negatively. You should immediately notify the appropriate reporting company if any errors are found in your report. Fix your credit history quickly to avoid years of future problems.

Although FACTA provides for free credit history reports once each year, your credit information and credit score change almost daily. Therefore, you may want to consider subscribing to one of the services at MyFICO.com that watches your credit information and alerts you when significant changes occur. This allows you to quickly fix any problems that pop up.

MyFICO.com offers credit scores and credit history reports as well as credit monitoring products that help prevent credit fraud.

Just be aware that it is not possible to get a free credit score even though you may be able to get a free credit history, if you are willing to suffer some inconvenience and delay. Most people would rather pay a small fee and get it all online, instantly. Actually you may be able to get a "free" credit score with the purchase of other services.

The credit score you don't know about – and can't get your hands on
The Fair-Isaac (MyFICO) company also produces industry-specific credit scores. One is for the auto sales industry – car dealers and auto finance companies. It's called the FICO Auto Industry Option Score. Many, but not all, car dealers and finance companies use this score instead of the normal FICO score that we've been discussing in this article, or they might use both.

A consumer's Auto Industry Option Score is based specifically on his car buying and financing history, and might be higher or lower than his general FICO score. Repossessions, late car payments, and bankruptcies that included cars, can all reduce a person's Auto Industry Option Score. It's possible to have good general FICO score, but a lower Auto Industry Option score.

Can we get out hands on this special score, as we are able to do with our general scores? No. So far, Fair-Isaac has not released this score to consumers. Only dealer and finance companies who subscribe to the service are allowed to see it. A helpful dealer finance manager might show it to customers who ask. Remember, your dealer might not use this special score.

How to get credit help to improve your score
The best way to improve your credit score is to simply pay your bills on time and avoid repossessions and bankruptcy. Also be patient because your scores won't improve overnight. It takes seven years for negative information in your credit history to disappear. Get copies of your credit reports and make sure there are no mistakes or old information that should have been removed.

For more, see our related article, Bad Credit Car Loans and Leases.

For more, see LeaseGuide.com